The second wave of recession, poor DJIA forecast and defaults in the Eurozone

Weak euro, sullen Dow Jones Industrial Average and suffering Eurozone

In brief: Falling Dow Jones Industrial Average is an omen of new challenges for the global economy.

Dow Jones Industrial Average reached a record low yesterday. The collapse of the Dow index was a real sorrow for all the world’s stock markets. Trading on the U.S. stock market for Dow Jones Industrial Average will start with a mark 9,774.02 points, and analysts predict a further decline in DJIA. If you save the current dynamics of exchange rates and economic growth, the recent reduction in the current account deficit in the U.S. will remain in the past – debts start to grow again. On the global financial markets volatility has returned. As a result, U.S. investors seem to be again a safe haven, and the dollar strengthened against the growth in demand for U.S. assets.

At first glance, you can safely forget about the sustained recovery of world economy. Strengthening U.S. dollar will result in not only slowing growth in the U.S., but also provoke a surge of protectionism in the market, and may hinder the process of economic recovery. However, if you dig deeper, it becomes clear that the danger will also be and stability of the entire global financial system, since some types of assets once enjoyed undeserved speculative demand. Ultimately, the growth in demand for assets has provoked the formation of bubbles, the explosion which has been a disaster for the world economy. Consider the risks. Financial markets tend to leave unprotected, highly indebted countries of Southern Europe. Greece became the only impetus for the development of events, however, attention is now riveted on all countries with high levels of public debt relative to GDP. Naturally, increasing the budget deficit, for the most part – a direct result of support that was provided to companies in the worst times of global financial crisis. In this context, it is the consequences of actions the government who stood up to protect the industries of the private sector with highly leveraged, and guarantee their debt.

The question now is whether individual governments to fulfill their guarantees are not at the expense of other commitments. Greece, for example, be able to. But not without the participation of other countries with stronger balance sheets, such as Germany and France. Underlying demand for American assets is the desire of investors to safer investments. This is confirmed by the fall of the U.S. bond yield and the growth of the dollar. However, we must admit that the prices of U.S. stocks fell despite the inflow of foreign capital the U.S.. This can be explained by the strengthening of currencies and fears that disrupt the process of economic recovery in the U.S.. Without a doubt, this is a serious cause for concern about the restoration of the world economy. On the other hand, the austerity measures that were introduced in Europe, responsible for 18% of the world economy will also slow global recovery. It turns out that the EU’s contribution to world demand and, consequently, to economic growth will be very small. In fact, those who hope for a weak euro as a catalyst for growth that does not take into account that in this situation, the pressure would be not only States but also other countries of the Old World, including Britain. On the other hand, the volatility in the currency market may persist, resulting in a fall on the financial markets, will lead to a loss of confidence and will bring us back into recession. Nevertheless, I’d rather sluggish recovery than a recession. Meanwhile, the strengthening of the dollar and slow growth in Europe would slow the recovery process in the U.S..

If it was going faster than in Europe, and the dollar would have lost their competitiveness in the United States would have started a significant increase in the deficit, and in Europe – the surplus. Is it possible to repeat this scenario a few years in an unbalanced U.S. economy? We forecast a moderate increase in the current account deficit in the U.S. and rising surpluses in Japan and the Eurozone. But not to such an extent as it was in 2007. The volume of Chinese imports grow, and surplus is thus reduced. This means that the world economy has not lost its balance. In addition, we can assume that wealthy investors have received a good lesson that they will remember, at least for the near future. They are no longer eager to lend decently indebted households, countries, companies or individuals. Moreover, debtors and do not tend to go into new loans, according to recent data, companies and individuals who want to repay their debts and bring their finances on a more sustainable level. In addition, the liquidity formed economies with surplus, new haven, which was not until 2007.

Now, to support rapid growth, China must invest heavily in infrastructure. The same can be said about Brazil, Russia and India. Also do not forget that the search and development of new mineral deposits entail additional costs. In short, investment in developing economies is likely to increase as compared with the recent past. This means that the risk of exacerbating global imbalances is unlikely to lead to a repetition of the crisis of 2007 caused by the search for safer assets in developed economies. Under the conditions of excess liquidity, the crisis will probably not be avoided. But it will be different. Protectionist sentiment in the U.S. – another risk factor for the global economy. China has already hinted that the fall of the euro gives effect, tantamount to strengthen the yuan, pegged to the dollar, so there is no need for further action in this direction. Despite the fact that this statement has some truth, most likely, it will not reduce the pressure from the U.S. to other countries concerning the strengthening of their currencies, because the trade deficit will rise again. We look forward to reducing the trade surplus of China against the background of increasing volumes of imports.

According to our forecasts, reducing the deficit in the U.S. remained in the past, and now, a new trend, opposite the previous one. This fact gives rise to another serious concern. At the heart of the global financial crisis lie the processes of transformation of the huge surpluses of developing countries in the influx of cheap liquidity that flooded the economy. However, high-quality assets in developed economies were able to absorb all the excess liquidity. This led to the creation of assets that looked good quality, but in fact are not. Consequences of the burst bubble in the markets of these assets are felt to this day. Also, large flows of liquidity in the developed economies have stimulated the growth of credit, since interest rates were low, and loans – available. As a result, the availability of credit for benign conditions stimulated the growth of the market these assets in the absence of proper controls.

Anrey Torbinski
2010-07-01 12:57, Economics.

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